The housing crisis has many people worried. Every day thousands of people are losing their homes to foreclosure. But for many people, the problems don’t end there. They must deal with possible tax ramifications.
For those of you who don’t know, the general rule of thumb is that debt cancellation is a taxable event for the homeowner. There are a few exceptions, including title 11 bankruptcy, qualified agricultural indebtedness, insolvency, and certain qualified commercial real estate debts. But these exclusions can be complex, so taxpayers should be very careful when analyzing their situation.
An exclusion under which many taxpayers will find relief is the Mortgage Forgiveness Debt Relief Act (the “Act”) of 2007. This allows qualifying taxpayers to exclude indebtedness from the qualified primary residence if the balance of the Mortgage was less than $ 2 million ($ 1 million for a married person filing separately). The Law applies to qualified indebtedness (normally purchase money and / or original acquisition debt) in the principal residence of a taxpayer.
If the cancellation of the debt resulted from the disposition of your primary residence and does not qualify under the Act, you may qualify under the bad debt exclusion. The bad debt exclusion is too complex to discuss in depth here, but let’s say if you don’t have many assets and you have substantial liabilities, you can possibly exclude some (if not all) of the debt cancellation from income on your tax return. . Return.
Another problem that many people may not be aware of is the fact that when a property is repossessed or sold through a short sale, you must determine if there is any gain or loss on the sale or disposition of the property. People do not realize that a foreclosure is still a disposition and must be analyzed accordingly. Under certain circumstances, the taxpayer may have a taxable profit even though the property has been repossessed.
If the debt cancellation is related to a rental or investment property, you should take special care. Dealing with tax issues associated with rental or investment property can be very challenging, so you should seek the help of a professional.
Taxpayers should realize that analyzing the tax impact of debt cancellation is complex and should seek the guidance and advice of a CPA or other qualified tax professional for any issues they have. Not only is it possible for them to have a tax bill, but they also need to make sure that all forms required by the IRS are properly completed.